ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

The Role of Credit Guarantee Systems and Mutual Guarantee Societies in Supporting Finance to SMEs
ADB - OECD Workshop on Enhancing Financial Accessibility for SMEs Manila, 6 7 March 2013
Lucia Cusmano Senior Economist OECD Centre for SMEs, Entrepreneurship & Local Development (CFE)

Overview
1. Rationale and diffusion of Credit Guarantee Schemes 2. Typologies and operational characteristics 3. Evaluation of CGS 4. Key challenges and policy considerations

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

OECD Working Party on SMEs and Entrepreneurship (WPSMEE) Mission

To help OECD and non-OECD economies develop policies that: Foster entrepreneurship Facilitate sustainable growth, competitiveness, and skilled jobs creation, and Help their SMEs to meet the challenge of globalisation.

The WPSMEEs areas of work

Finance Globalisation Innovation Country Reviews

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

CGS: rationale and diffusion

Long established credit risk transfer mechanism to ease access to credit finance for firms limited by
- information asymmetry

- little credit history - under collateralisation

Highly heterogeneous Largely diffused and unprecedented growth over the last years
instrument of choice during the crisis in many OECD countries increasingly adopted in non-OECD countries to expand credit markets and improve financial inclusion

CGS worldwide
Volume of outstanding guarantees (%GDP), 2011
8.0 7.0

6.0
5.0 4.0

3.0
2.0 1.0 0.0

Austria Belgium Bulgaria Chile Chinese Taipei Czech Republic Estonia France Germany Greece Hungary Italy Japan Korea Latvia Lithuania Luxembourg Netherlands Poland Portugal Romania Slovakia Slovenia Spain Turkey US
Source: AECM (2012), Pombo (2010)

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Expansion in OECD countries in the aftermath of the financial crisis

Guarantees granted per year in selected European CGSs: value (EUR) and yearly growth rate (%, right scale), 2000-2011
40,000 60%

35,000 30,000
25,000 20,000 15,000

50% 40%
30% 20% 10%

10,000
5,000 0

0%
-10% -20%

Volumes of Guarantees
Source: AECM
* Preliminary data for 2011

y-o-y growth rate (RHS)

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largely through public support

Government Guarantees (Value, 2007=100) 2007 Guarantees Chile Czech Republic Finland Hungary Netherlands Spain Turkey Guaranteed loans Canada France Italy Korea United Kingdom 100 100 100 100 100 100 100 2008 94 119 105 114 98 139 538 2009 261 195 114 133 90 198 1066 2010 442 300 107 122 231 182 1772 2011 490 67 119 111 254 216 2119

100 100 100 100 100

108 117 100 108 86

100 193 213 142 na

108 186 396 141 284

108 151 365 140 175

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Source: OECD Scoreboard on SME and Entrepreneurship financing (forthcoming)

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Credit guarantees as countercyclical instruments

Official loan guarantees and direct official loans most widely used policy measures to increase access to finance in the aftermath of the crisis o New or expanded programmes - special guarantees for start-ups, export firms - equity guarantees o Change in nature: Before the crisis mainly concentrated on long term investment credits Following liquidity shortages, increasing support to working capital needs

Less stringent criteria for accessing guarantees

Share of rejected guarantee requests, 2007-2011
16.00% 14.43% 14.00% 13.53% 13.40%

12.00%

11.39% 10.84%

10.00%

8.00% 2007 2008 2009 2010 2011

Note: Sample of 17 Credit Guarantee Schemes in Europe. Source: AECM

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Increasing adoption in emerging economies, as credit markets expand

India: Credit Guarantee Fund Scheme for Micro and Small Enterprises Credit Volume (100,000 Indian Rupees) and participating banks
800,000 90 700,000 80 600,000 70 60 50 40 300,000 30 200,000 20 100,000 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Reserve Bank of India and Indias Ministry of Micro, Small and Medium Enterprises

500,000

400,000

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Public Guarantee Schemes

Variety of management models and delivery mechanisms
Operated by public agencies ( Canada, Chile, Estonia, France, Japan, Russia, US and in most cases in developing countries) Decentralised or partnership model: public oversight but delivery entirely delegated to lenders (the Netherlands, UK) Private legal entities owned by the public (Romania, Colombia) Public-private schemes with majority public stake (Hungary, Turkey)

Often not directly engaged in risk assessment and lending decision Complementary services (business advice, export support) and specific targets (e.g. innovative firms) Supervision by central government or Central Bank
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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Mutual Guarantee Societies

Direct participation of the private sector Direct Mutuality : SMEs as shareholders, managers and borrowers Indirect Mutuality: created and managed by business association,
chambers of commerce, financial institutions

SMEs, territorial and sectoral focus

Strong ties with the local community In-depth knowledge of sectors, markets, local businesses high social capital, mature local institutions o o

Retail approach
o Direct engagement in credit risk assessment and lending decisions on a case-by case basis high quality and high cost

Role of government
o o Direct funding and/or counter-guarantees Regulation and tax reductions
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Demand for evaluation

o Accountability o Policy assessment and learning (at a time of stringent public budget constraints)
Quantitative and qualitative analyses leading to policy recommendations Identification and diffusion of best practices Platform for dialogue between policy makers, financial institutions, the business community, international organisations and NGOs.

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Evaluation dimensions
Financial Sustainability Ability to generate autonomously the resources required for operating Financial Additionality Increase in the flow of funds towards viable SMEs that are credit-constrained Economic Additionality Effect of increased access to finance by beneficiary SMEs on overall economic welfare

Financial Sustainability: key variables

Costs Costs of funds Operational costs Losses on guarantees Financial returns Guarantee fees Administrative fees Return on finacial investments

Main determinants scheme design credit risk management firm eligibility coverage ratio retail vs portfolio guarantee term portfolio composition pricing claim handling

default rates and loan losses quality of management and organisation efficiency

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Evidence on Financial Sustainability

Scarce evidence: lack of accurate and timely data

Need for transparent accounting practices in PGSs

Element of public support in private or mixed schemes

essential role of public counter-guarantee system for mutual and public-private schemes

to be assessed againts : -financial and economic additionality of the scheme - net costs of alternative policies to achieve similar objectives

Sustainability of anti-crisis measures: the higher risk exposure for Credit Guarantee Schemes
Payout to lenders/ volume of outstanding guarantees
9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2006

2007

2008

2009

2010

2011

Source: AECM * sample of 15 guarantee schemes in Europe

ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Evaluation: Financial Additionality (1)

Scheme-level Leverage ratio : outstanding guarantees/guarantee fund (how much credit generated by given amount of capital)
Koreas KODIT (2006 - 2011)
50,000 45,000 40,000 35,000 30,000 25,000 8.0 20,000 15,000 10,000 5,000 0 2006 2007 Capital of the Fund 2008 2009 Outstanding Guarantees 2010 LR 2011 3,720 3,607 3,721 6,376 6,508 6,627 8.0 29,634 28,917 8.5 7.4 7.3 6.9 31,743 46,913 47,333 20 45,487 18 16 14 12 10 8 6 4 2 0

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Source: KODIT

Evaluation: Financial Additionality (2)

Leverage ratio for selected European CGSs, 2009
35 30 25 20 15 10 5 0

Source: AECM

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Evidence on Financial and Economic Additionality

Positive evidence on financial additionality: - Increase credit volumes - Improve conditions (interest rates, loan terms)
MGS in particular: o High degree of selectivity and tailored service o Signalling effect
Critical issue: design of the scheme and selection mechanisms borrowers self-selection (creditworthy) lenders shifting ordinary credits under the scheme

Little studies on economic additionality: - Modelling approaches - Positive evidence on survival, growth and employment
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Key challenges to MGSs

Policy role and financial sustainability
o Charged with anti-crisis functions o Expansion of public counter-guarantees
Increased default rates and dependence on public support What balance policy objectives financial sustainability? What model for sustainability beyond the crisis?

New regulatory framework (Basel III)

o Evolution supervised financial intermediaries

o Increase of administrative costs and expertise

What operational scale and management model for effectiveness and sustainability?

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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

Emerging trends
o Consolidation and increase in scale: trade-off scale (efficiency) vs. relationship (informed credit-risk assessment)
o Rationalisation and guarantee-filiere structuring: SMEs Banks
rationalisation

First Tier CGSs Regional CGS

strengthening

National Counter-Gurantee Fund

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Policy considerations
Clear specification of targets and coordination with broader set of SME policies Scheme design is crucial to ensure sustainability and additionality Public-private partnership can bring information advantages and expertise in credit risk management Counter-guarantee funds generate important leverage, but all parties should retain risk and responsibility Effect of financial reforms on CGSs should be thoroughly assessed

Support organisational transition and skill upgrading in MGSs

Improve PGS reporting for monitoring and assessment
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ADB-OECD Workshop on Enhancing Financial Accessibility for SMEs

2013/3/6 Session 3

THANK YOU
Lucia.Cusmano@oecd.org
OECD CENTRE FOR ENTREPRENEURSHIP, SMEs & LOCAL DEVELOPMENT(CFE)
www.oecd.org/cfe

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